Everyone likes to make money. I have yet to meet someone who doesn’t. But sometimes we make the mistake of assuming that just because money is likely to be made that it already belongs to us.
This is especially true for Forex traders. We constantly face the challenge of keeping an already-profitable position open for the opportunity to make even more money. That isn’t an easy task, especially when the market begins to turn against you.
That’s the dilemma today’s article will focus on by taking a look at how unrealized gains can negatively influence your trading. We will discuss two situations in which these gains can be problematic as well as a two-part solution that will help you avoid falling into this all-too-common trap.
What are "Unrealized Gains"?Unrealized gains, also called “paper” profit is any gain that has yet to be cashed in or realized. This happens when you are in a winning position but have yet to close the position for a profit.
The same holds true for an unrealized loss, which is any loss from a losing position that has yet to be closed.
Of course unrealized gains can quickly become unrealized losses and vice versa. This is especially true in the Forex market where there is no shortage of volatility.
For purposes of this article, however, we are only going to focus on unrealized gains. Because believe it or not this is where most Forex traders fall short of becoming consistently profitable.
Robbing Yourself of ProfitsRobbing yourself of profits as a Forex traderOne of the biggest challenges every Forex trader faces, beginner and experienced alike, is knowing when to book profits. The process of getting in a trade and setting your take profit and stop loss orders is easy enough.
But to see that trade through to the intended profit target is quite the challenge.
It all starts when you enter a long position with a target of 300 pips and a 100 pip stop loss. Let’s assume you have a $10,000 account and set your risk at $200 for this particular trade.
The market begins moving in your favor and has just hit a minor level of resistance with your position in profit by 200 pips. You’re now staring at an unrealized gain of $400 with the market beginning to stall.
You check back in a few hours and that $400 is now $300. You panic at the thought of losing more of this money that you’ve “made” so you close the position.
The next morning you wake up to find that the market has not only moved higher but has also moved into an area that would have hit your original profit target of $600. This means you missed out on $300 of profit.
Your emotions start running wild. One second you’re kicking yourself for not having the discipline to ride it out and the next you’re trying to justify your emotional decision-making by thinking of the $300 you’ve just made.
Sound familiar?
This is the first way that focusing on unrealized gains can hurt you. But it gets worse…
The Real Issue With Focusing on Unrealized GainsBecoming a process-oriented Forex traderClosing a trade earlier than you should can be painful, but letting a trade go from a winning position to a losing one is far more taxing on your emotions and damaging to your trading performance overall.
We’ve all been there to see a massively profitable position turn negative. If it hasn’t happened to you yet, it will. It’s something that all traders must experience along the journey to consistent profits.
When you close this once-profitable position for a loss, it completely alters your trading psyche. The next time you are in a profitable position you will inevitably find yourself hovering over your account to make sure it doesn’t happen again. And nothing good ever comes from hovering.
You are now fearful of giving back gains so you constantly close positions as soon as they turn profitable. This is more destructive than you realize because you are now closing your winners early and potentially letting your losers run – the opposite of what you need to do to become a successful Forex trader.
In essence you are right back to robbing yourself of profits. It’s a viscous cycle.
Focusing on unrealized gains in this situation makes you feel as though you’ve lost something when these paper profits turn negative. But the truth is, you have lost nothing because you can’t lose something you never had in the first place.
A Simple SolutionThe best part about this problem of focusing on unrealized gains is that it’s an easy fix. Well at least the physical part of the fix that I’m about to show you is easy. The mental game on the other hand may take some time but I can guarantee that it will be well worth the effort.
Part ITerminal window in MetaTrader4Let’s start with the easy part – the physical change. I’m going to assume that most of you are trading on the MetaTrader (MT4) platform. For those who are trading on something other than MT4, your trading platform should have something similar to the following.
In the MT4 platform there is a “terminal” window. This is the area at the bottom of the screen that shows any open positions along with the unrealized gain or loss at any given time.
Because we trade the higher time frames where most trades stay open for several days, there is really no need to keep this window open at all times. Therefore the quick fix to the problem is to simply close the terminal window.
As they say – out of sight, out of mind. I did say this was a simple solution, didn’t I?
All joking aside, this one simple change had a hugely positive impact on my trading when I first implemented it years ago. It’s ironic how sometimes the simplest of changes can deliver the most significant results.
Part II
Change how you view unrealized gains in the Forex marketThe second part of the solution requires more effort on your part. It involves changing the way you view unrealized gains so that they no longer have a negative impact on your trading.
To do this you have to realize that these “gains’ were never yours to begin with. Until you close a position, any gains made belong to the Forex market. Only once you close the position can you claim ownership of that money.
So the next time you see unrealized gains in your account just remember that they don’t belong to you, at least not yet.
These gains are simply a byproduct of market fluctuations against your open position and are therefore meaningless. They don’t become meaningful until you close the position.
Until that time comes you are far better off focusing on the trade setup at hand rather than concerning yourself with something that was never yours in the first place.
